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Charitable Estate Planning Part I - Charitable Lead Trusts (CLTs)--Leave a Legacy to Charity & Loved Ones; not to Uncle Sam

Posted on: February 3rd, 2014

This is Part I of a two-part series about Charitable Estate Planning - Leaving Your Legacy to Charity & Loved Ones; not to Uncle Sam. This article discusses a popular and effective tool for preserving your estate for your loved ones and charities--the Charitable Lead Trust (CLT).

The Charitable Lead Trust is a type of charitable trust that can reduce or virtually eliminate estate taxes that might be imposed on wealth passing to heirs. Clients use this attractive planning tool to ensure their estates pass to their loved ones and those charitable organizations in which they believe rather than passing to the government through taxes.

In order to accomplish this goal, you create a trust that grants to a charity or charities, for a set number of years, the first or 'lead' right to receive payments from the trust. At the end of the term of years, your children or grandchildren receive the balance of the trust property--which often is greater than the amount contributed--free of estate tax in most instances. Although the Charitable Lead Trust is a complex estate planning strategy, the steps to implement it are few and simple from your perspective.

One of the most frequently used Charitable Lead Trusts operates this way:

You, the Grantor, create a Charitable Lead Trust as part of your revocable living trust planning. Upon your death, the amount of property that you designate will pass to the Charitable Lead Trust. The qualified charitable organization that you name in your Revocable Living Trust will be the "income beneficiary" of the Charitable Lead Trust. The charitable "income beneficiary" receives a fixed, guaranteed amount from the trust for a certain number of years (determined by you with the assistance of your legal and financial advisors.) Generally, any charity that has received tax-exempt status through an IRS determination qualifies, but this is not always the case. It is best for you to confirm, with the assistance of your attorney or financial advisors, during your estate planning that the charity you select meets the IRS qualifications for this favorable tax treatment.

At the end of the Charitable Lead Trust's term, the remaining assets in the trust pass to non-charitable trust beneficiaries, such as your children and grandchildren, free of estate and gift tax. These assets can pass outright to the beneficiaries, or can continue to be held in trust, either in new trusts or in trusts previously established for the benefit and protection of beneficiaries.

The charity will receive the same dollar amount each year, no matter how its investments perform. The remainder interest ultimately passing to the heirs, however, will be affected by the performance of the trust's investments.

Charitable Lead Trusts are particularly suited for hard-to-value assets (such as real estate or family limited liability company interests) and assets which are expected to grow rapidly in value.